Why New Real Estate Investors Should Avoid Partnerships

Many new real estate investors partner with friends to create real estate investing companies. At first, entering into a partnership can seem like a great idea. If you pool your assets with another person, you can buy more expensive properties from the start and – hopefully – realize greater income early on.

But proceed with caution. The actions of a partner can lose you money or, in extreme cases, bring your dreams of real estate wealth to an early end.

Here’s a case study. When Paul and Geri became partners, things went well at first. They each invested a manageable amount of money and bought their first single-family investment home. A week later, Paul visited the property and found a construction crew ripping out the old kitchen cabinets and replacing them with expensive new units. Geri had made the decision to replace the kitchen on her own, without conferring with Paul.

That kind of problem occurs more often than you might expect. Here is some wise advice to follow about partnerships:

  • Go it alone if you possibly can. Remember that the advice, “Only do business with a partner whom you trust” is not very smart. After all, you are not going to do business with a partner you don’t trust, right? And you cannot predict everything a partner might potentially do that could land you in trouble.
  • Talk to your attorney before you enter into a partnership. Are there strategies that can insulate you from unwise or dishonest partners?
  • Consider using passive investors or construction loans instead of a partner. They lend you money, expect a return on their investment, but do not have decision-making power over the properties you buy, or how you improve or market them.
  • If you already have a partnership, consider converting it into an LLC corporation instead. Again, talk with your attorney to find out whether the right kind of corporate structure could protect your personal assets in case your real estate partnership gets sued, goes out of business, or incurs other unexpected losses.

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